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Monte-Carlo Simulation Monte-Carlo simulation is based on the risk- neutral valuation result. The expected payoff in a risk-neutral world is calculated using a sampling procedure. It is then discounted at the risk-free interest rate.

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1. Sample a random path for in a risk-neutral world. 2. Calculate the payoff from the derivative. 3. Repeat steps one and two to get many sample values of the payoff from the derivative in a risk- neutral world. 4. Calculate the mean of the sample payoffs to get an estimate of the expected payoff in a risk-neutral world. 5. Discount the expected payoff at the risk-free rate to get an estimate of the value of the derivative.